nep-mon New Economics Papers
on Monetary Economics
Issue of 2017‒07‒09
twenty papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Populism and Central Bank Independence By Goodhart, Charles A; Lastra, Rosa
  2. Central Bank Digital Currencies: A Framework for Assessing Why and How By Ben Fung; Hanna Halaburda
  3. Should Inflation Measures Used by Central Banks Incorporate House Prices? The Czech National Bank's Approach By Tomas Havranek; Mojmir Hampl
  4. The shifting drivers of global liquidity By Avdjiev, Stefan; Gambacorta, Leonardo; Goldberg, Linda S.; Schiaffi, Stefano
  5. Nominal GDP Targeting With Heterogeneous Labor Supply By Bullard, James B.; Singh, Aarti
  6. Monetary policy transmission and trade-offs in the United States: Old and new By Boris Hofmann; Gert Peersman
  7. Formation of inflation expectations in turbulent times : Can ECB manage inflation expectations of professional forecasters? By Łyziak, Tomasz; Paloviita, Maritta
  8. How big is the toolbox of a central banker? Managing expectations with policy-rate forecasts: Evidence from Sweden By Åhl, Magnus
  9. Macroprudential Policy: Case Study from a Tabletop Exercise By Adrian, Tobias; de Fontnouvelle, Patrick; Yang, Emily; Zlate, Andrei
  10. The Paul Storer Memorial Lecture—Cross-Border Trade Integration and Monetary Policy By Stephen S. Poloz
  11. Interest Rate Volatility and Sudden Stops : An Empirical Investigation By Ricardo M. Reyes-Heroles; Gabriel Tenorio
  12. Liquidity Shocks, Dollar Funding Costs, and the Bank Lending Channel during the European Sovereign Crisis By Correa, Ricardo; Sapriza, Horacio; Zlate, Andrei
  13. Between hawks and doves: measuring central bank communication By Tobback, Ellen; Nardelli, Stefano; Martens, David
  14. Sources of Liquidity and Liquidity Shortages By Kahn, Charles M.; Wagner, Wolf
  15. The Role of Money in the Business Cycle By Zhao Jianglin
  16. Central bank policy under strategic wage setting By Bieta, Volker
  17. Understanding Monetary Policy and its Effects: Evidence from Canadian Firms Using the Business Outlook Survey By Matthieu Verstraete; Lena Suchanek
  18. International Financial Spillovers to Emerging Market Economies: How Important Are Economic Fundamentals? By Ahmed, Shaghil; Coulibaly, Brahima; Zlate, Andrei
  19. The partially pegging exchange rate problem: a three-country model By Chen, John-ren
  20. Why Has Japan Failed to Escape from Deflation? By Kota Watanabe; Tsutomu Watanabe

  1. By: Goodhart, Charles A; Lastra, Rosa
    Abstract: The consensus that surrounded the granting of central bank independence in the pursuit of a price stability oriented monetary policy has been challenged in the aftermath of the global financial crisis, in the light of the rise of populism on the one hand and the expanded mandates of central banks on the other hand. After considering the economic case for independence and the three Ds (distributional, directional and duration effects), the paper examines three different dimensions in the debate of how the rise in populism - or simply general discontent with the status quo - affects central bank independence. Finally, the paper examines how to interpret the legality of central bank mandates, and whether or not central banks have exceeded their powers. This analysis leads us in turn to consider accountability and, in particular, the judicial review of central bank actions and decisions. It is important to have in place adequate mechanisms to "guard the guardians" of monetary and financial stability.
    Keywords: accountability; central bank independence; Judicial review; Legitimacy; Mandates; populism
    JEL: E50 E58 H10 K10
    Date: 2017–06
  2. By: Ben Fung; Hanna Halaburda
    Abstract: Digital currencies have attracted strong interest in recent years and have the potential to become widely adopted for use in making payments. Public authorities and central banks around the world are closely monitoring developments in digital currencies and studying their implications for the economy, the financial system and central banks. One key policy question for public authorities such as a central bank is whether or not to issue its own digital currency that can be used by the general public to make payments. There are several public policy arguments for a central-bank-issued digital currency. This paper proposes a framework for assessing why a central bank should consider issuing a digital currency and how to implement it to improve the efficiency of the retail payment system.
    Keywords: Digital Currencies, Financial services, Payment clearing and settlement systems
    JEL: E41 E42
    Date: 2016
  3. By: Tomas Havranek; Mojmir Hampl
    Abstract: In this note we describe the Czech National Bank's approach to incorporating macroprudential considerations into monetary policy decision making: the use of a broader inflation measure that gives substantial weight to house prices and is considered along with headline CPI inflation. We argue that, in terms of theory, the broader inflation gauge is at least as suitable for measuring the value of money as headline CPI inflation is, but we also acknowledge practical problems that arise from the use of the broader index.
    Keywords: Consumer price index, financial stability, house prices, macroprudential policy, monetary policy, owner-occupied housing
    JEL: E31 E44 E50 R30
    Date: 2017–06
  4. By: Avdjiev, Stefan (Bank for International Settlements); Gambacorta, Leonardo (Bank for International Settlements); Goldberg, Linda S. (Federal Reserve Bank of New York); Schiaffi, Stefano (Bocconi University)
    Abstract: The post-crisis period has seen a considerable shift in the composition and drivers of international bank lending and international bond issuance, the two main components of global liquidity. The sensitivity of both types of flows to U.S. monetary policy rose substantially in the immediate aftermath of the global financial crisis, peaked around the time of the 2013 Federal Reserve “taper tantrum,” and then partially reverted toward pre-crisis levels. Conversely, the responsiveness of international bank lending to global risk conditions declined considerably after the crisis and became similar to that of international debt securities. The increased sensitivity of international bank flows to U.S. monetary policy has been driven mainly by post-crisis changes in the behavior of national banking systems, especially those that ex ante had banks that were less well capitalized. By contrast, the post-crisis fall in the sensitivity of international bank lending to global risk was mainly owing to a compositional effect, driven by increases in the lending market shares of national banking systems that were better capitalized. The post-2013 reversal in the sensitivities to U.S. monetary policy partially reflects the expected divergence in the monetary policies of the United States and other advanced economies, highlighting the sensitivity of capital flows to the degree of commonality of cycles and the stance of policy. Moreover, global liquidity fluctuations have largely been driven by policy initiatives in creditor countries. Policies and prudential instruments that reinforced lending banks’ capitalization and stable funding levels reduced the volatility of international lending flows.
    Keywords: global liquidity; international bank lending; international bond flows; capital flows
    JEL: F34 G10 G21
    Date: 2017–06–01
  5. By: Bullard, James B. (Federal Reserve Bank of St. Louis); Singh, Aarti (University of Sydney)
    Abstract: We study nominal GDP targeting as optimal monetary policy in a model with a credit market friction following Azariadis, Bullard, Singh and Suda (2016), henceforth ABSS. As in ABSS, the macroeconomy we study has considerable income inequality which gives rise to a large private sector credit market. Households participating in this market use non-state contingent nominal contracts (NSCNC). We extend the ABSS framework to allow for endogenous and heterogeneous household labor supply among credit market participant households. We show that nominal GDP targeting continues to characterize optimal monetary policy in this setting. Optimal monetary policy repairs the distortion caused by the credit market friction and so leaves heterogeneous households supplying their desired amount of labor, a type of “divine coincidence” result. We also analyze the case when there is an aging population. We interpret these findings in light of the recent debate in monetary policy concerning labor force participation.
    Keywords: Non-state contingent nominal contracting; optimal monetary policy; nominal GDP targeting; life cycle economies; heterogeneous households; credit market participation; labor supply
    JEL: E4 E5
    Date: 2017–02–17
  6. By: Boris Hofmann; Gert Peersman
    Abstract: This study shows that, in the United States, the effects of monetary policy on credit and housing markets have become considerably stronger relative to the impact on GDP since the mid-1980s, while the effects on inflation have become weaker. Macroeconomic stabilization through monetary policy may therefore have become associated with greater fluctuations in credit and housing markets, whereas stabilizing credit and house prices may have become less costly in terms of macroeconomic volatility. These changes in the aggregate impact of monetary policy can be explained by several important changes in the monetary transmission mechanism and in the composition of macroeconomic and credit aggregates. In particular, the stronger impact of monetary policy on credit is driven by a much higher responsiveness of mortgage credit and a larger share of mortgages in total credit since the 1980s.
    Keywords: Monetary policy trade-offs, monetary transmission mechanism, inflation, credit, house prices
    JEL: E52
    Date: 2017–06
  7. By: Łyziak, Tomasz; Paloviita, Maritta
    Abstract: This paper studies the formation of inflation expectations in the euro area. We first analyse the forecast accuracy of ECB inflation projections relative to private sector forecasts. Then, using the ECB Survey of Professional Forecasters (ECB SPF), we estimate a general model integrating two theoretical concepts: the hybrid model of expectations, including rational and static expectations, and the sticky-information (epidemiological) model. When modelling inflation expectations we consider – except for backward-looking factors – the rational expectations assumption and the effects of ECB communication. More specifically, we examine whether ECB inflation projections are still important in expectations’ formation once the impact of forward-lookingness of economic agents has been taken into account. We also derive implicit (perceived) inflation targets and assess their consistency with the official ECB inflation target. Our analysis indicates that the recent turbulent times have contributed to changes in expectations’ formation in the euro area, as the importance of backward-looking mechanisms has decreased, while the importance of the perceived inflation target has increased. We also find that the perceived inflation target has remained broadly consistent with the official ECB inflation target in the medium-term. However, the downward trend of the perceived target suggests some risks of de-anchoring of inflation expectations. The importance of ECB inflation projections for medium-term private sector inflation expectations has increased over time, but the magnitude of this effect is rather small. However, SPF inflation forecasts remain consistent with ECB communication, being either close to ECB projections or between ECB projections and the inflation target.
    JEL: D84 E52 E58
    Date: 2017–06–28
  8. By: Åhl, Magnus (Monetary Policy Department, Central Bank of Sweden)
    Abstract: Some central banks have decided to publish forecasts of their policy rates. Can such forecasts manage market expectations of future policy rates? I use regression analysis on Swedish data to conclude that the answer is yes. The published Riksbank forecasts affect expectations of the future repo rate up to a horizon of approximately a year and a half. However, the response of market expectations to a surprise in the announced repo-rate path is not one-to-one, but is estimated to be less than half of the surprise and decreasing with the forecast horizon.
    Keywords: Policy-rate path; monetary-policy expectations
    JEL: E52 E58 G14
    Date: 2017–05–01
  9. By: Adrian, Tobias (International Monetary Fund); de Fontnouvelle, Patrick (Federal Reserve Bank of Boston); Yang, Emily (Federal Reserve Bank of New York); Zlate, Andrei (Federal Reserve Bank of Boston)
    Abstract: Since the global financial crisis of 2007-09, policy makers and academics around the world have advocated the use of prudential tools for macroprudential purposes. This paper presents a macroprudential tabletop exercise that aimed at confronting Federal Reserve Bank presidents with a plausible, albeit hypothetical, macro-financial scenario that would lend itself to macroprudential considerations. In the tabletop exercise, the primary macroprudential objective was to reduce the likelihood and severity of possible future financial disruptions associated with the hypothetical overheating scenario. The scenario provided a path for key macroeconomic and financial variables, which were assumed to be observed through 2016:Q4, as well as the corresponding hypothetical projections for the interval from 2017:Q1 to 2018:Q4. Prudential tools under consideration included capital-based tools such as leverage ratios, countercyclical capital buffers, and sectoral capital requirements; liquidity-based tools such as liquidity coverage and net stable funding ratios; credit-based tools such as caps on loan-to-value ratios and margins; capital and liquidity stress testing; as well as supervisory guidance and moral suasion. In addition, participants were asked to consider using monetary policy tools for financial stability purposes. Under the hypothetical scenario, participants found many prudential tools less attractive due to implementation lags and limited scope of application and favored those deemed to pose fewer implementation challenges, such as stress testing, margins on repo funding, and guidance. Also, monetary policy came more quickly to the fore as a financial stability tool than might have been thought before the exercise. The tabletop exercise abstracted from governance issues within the Federal Reserve System, focusing instead on economic mechanisms of alternative tools.
    Keywords: Financial stability; macroprudential policy; monetary policy; financial overheating; tabletop exercise
    JEL: E58 G01 G18
    Date: 2015–09–30
  10. By: Stephen S. Poloz
    Abstract: In this paper we explore the nexus between cross-border trade integration and monetary policy. We first review the evidence that trade liberalization has increased the degree of integration in North America and conclude that, while robust structural inferences remain elusive, there is sufficient supporting evidence for central banks to treat the issue seriously. The paper then discusses several channels by which increased integration might affect macroeconomic models. We introduce modifications to the Bank of Canada’s main policy model, ToTEM, to capture some of the impacts of integration suggested in the literature and generate stochastic simulations to compare versions of the model with low and high integration. The main conclusion is that increased integration may make it more challenging for central banks to control inflation, in the sense that doing so will require more variability in interest rates, exchange rates and the output gap.
    Keywords: Economic models, Monetary Policy, Trade Integration
    JEL: E37 E5 F1 F41 F6
    Date: 2016
  11. By: Ricardo M. Reyes-Heroles; Gabriel Tenorio
    Abstract: Using a multi-country regime-switching vector autoregressive (VAR) model we document the existence of two regimes in the volatility of interest rates at which emerging economies borrow from international financial markets, and study the statistical relationship of such regimes with episodes of sudden stops. Periods of high volatility tend to be persistent and are associated with high interest rates, the occurrence of sudden stops in external financing, and large declines in economic activity. Most strikingly, we show that regime switches drive the countercyclicality of interest rates in emerging markets documented in previous literature (Neumeyer and Perri, 2005) and that high-volatility regimes forecast sudden stops 6 and 12 months ahead.
    Keywords: Volatility ; Interest rates ; Emerging market economies ; Sudden stops ; Markov regime switching
    JEL: E3 E43 F34 F4 G12 G15 O11 O16
    Date: 2017–07
  12. By: Correa, Ricardo (Board of Governors of the Federal Reserve System); Sapriza, Horacio (Board of Governors of the Federal Reserve System); Zlate, Andrei (Federal Reserve Bank of Boston)
    Abstract: This paper documents a new type of cross-border bank lending channel using a novel dataset on the balance sheets of U.S. branches of foreign banks and their syndicated loans. We show that: (1) The U.S. branches of euro-area banks suffered a liquidity shock in the form of reduced access to large time deposits during the European sovereign debt crisis in 2011. The shock was related to their euro-area affiliation rather than to country- or bank-specific characteristics. (2) The affected branches received additional funding from their parent banks, but not enough to offset the lost deposits. (3) The liquidity shock prompted branches to cut lending to U.S. firms, which occurred mostly along the extensive margin. In turn, the affected U.S. firms suffered reduced access to syndicated loans, which prompted them to cut investment and built up their cash reserves.
    Keywords: Sovereign risk; international banking; money market funds; liquidity management.
    JEL: F34 G15 G21
    Date: 2016–09–30
  13. By: Tobback, Ellen; Nardelli, Stefano; Martens, David
    Abstract: We propose a Hawkish-Dovish (HD) indicator that measures the degree of ‘hawkishness’ or ‘dovishness’ of the media’s perception of the ECB’s tone at each press conference. We compare two methods to calculate the indicator: semantic orientation and Support Vector Machines text classification. We show that the latter method tends to provide more stable and accurate measurements of perception on a labelled test set. Furthermore, we demonstrate the potential use of this indicator with several applications: we perform a correlation analysis with a set of interest rates, use Latent Dirichlet Allocation to detect the dominant topics in the news articles, and estimate a set of Taylor rules. The findings provide decisive evidence in favour of using an advanced text mining classification model to measure the medias perception and the Taylor rule application confirms that communication plays a significant role in enhancing the accuracy when trying to estimate the bank’s reaction function. JEL Classification: C02, C63, E52, E58
    Keywords: communication, data mining, monetary policy, quantitative methods
    Date: 2017–07
  14. By: Kahn, Charles M.; Wagner, Wolf
    Abstract: We investigate a model of liquidity sources that incorporates a general equilibrium feature of liquidity: when banks hold more liquidity, other sectors of the economy hold less of it and will consequently supply less in times of crisis. The private allocation of liquidity is inefficient and optimal liquidity regulation depends on the source of liquidity to which it is applied. Our model also identifies a limited role for public provision of liquidity, arising only when there is a general liquidity shortage in the economy but not if the shortage materializes solely in the banking system.
    Keywords: liquidity regulation; liquidity sources; public liquidity
    JEL: G21 G28
    Date: 2017–06
  15. By: Zhao Jianglin
    Abstract: The aim of this paper is to reemphasize the money theory of exchange which is centered on the function of exchange medium of money, and make a contribution towards linearization of the quantity equation of exchange. A dynamical quantity equation is presented and an important balanced path of economic evolution is derived. To understand the business cycle we propose a hypothesis of natural cycle and driving cycle concerning the evolution of the balanced path and plentiful conclusions can be made.
    Date: 2017–06
  16. By: Bieta, Volker (Center for Mathematical Economics, Bielefeld University)
    Date: 2017–04–04
  17. By: Matthieu Verstraete; Lena Suchanek
    Abstract: This paper shows (i) that business sentiment, as captured by survey data, matters for monetary policy decisions in Canada, and (ii) how business perspectives are affected by monetary policy shocks. Measures of business sentiment (soft data) are shown to have systematic explanatory power for monetary policy decisions over and above typical Taylor rule variables. Stronger (weaker) survey results lead to higher (lower) policy rates over the period of study (2001–16). Moreover, we study the effects of monetary policy shocks on firms’ business perspectives using data from the Bank of Canada’s quarterly Business Outlook Survey. The monetary shocks are defined as the fitted residuals of the Taylor rule. Overall, the results are in agreement with the qualitative effects of monetary policy shocks described in the literature. For instance, an unanticipated tightening in monetary policy a year ago (or more) results in firms reporting tighter lending conditions today, as well as slower expected dynamics of future sales, wage growth and output prices. The results are qualitatively similar whether shocks are derived from a standard Taylor rule (hard data) or from an alternative Taylor rule (soft data).
    Keywords: Firm dynamics, Interest rates, Transmission of monetary policy
    JEL: D22 E52 E44
    Date: 2017
  18. By: Ahmed, Shaghil (Board of Governors of the Federal Reserve System); Coulibaly, Brahima (Board of Governors of the Federal Reserve System); Zlate, Andrei (Federal Reserve Bank of Boston)
    Abstract: We assess the importance of economic fundamentals in the transmission of international shocks to financial markets in various emerging market economies (EMEs), covering the so-called taper-tantrum episode of 2013 and seven other episodes of severe EME-wide financial stress since the mid-1990s. Cross-country regressions lead us to the following results: (1) EMEs with relatively better economic fundamentals suffered less deterioration in financial markets during the 2013 taper-tantrum episode. (2) Differentiation among EMEs set in relatively early and persisted through this episode. (3) During the taper tantrum, while controlling for the EMEs' economic fundamentals, financial conditions also deteriorated more in those EMEs that had earlier experienced larger private capital inflows and greater exchange rate appreciation. (4) During the EME crises of the 1990s and early 2000s, we find little evidence of investor differentiation across EMEs being explained by differences in their relative vulnerabilities. (5) However, differentiation across EMEs based on fundamentals does not appear to be unique to the 2013 episode; it also occurred during the global financial crisis of 2008 and, subsequently, during financial stress episodes related to the European sovereign crisis in 2011 and China's financial market stresses in 2015.
    Keywords: Emerging market economies; financial spillovers; economic fundamentals; vulnerability index; depreciation pressure; taper tantrum; financial stress.
    JEL: E52 F31 F32 F65
    Date: 2017–06–05
  19. By: Chen, John-ren (Center for Mathematical Economics, Bielefeld University)
    Date: 2017–04–04
  20. By: Kota Watanabe (Canon Institute for Global Studies (CIGS) and University of Tokyo); Tsutomu Watanabe (Graduate School of Economics, University of Tokyo)
    Abstract: Japan has failed to escape from deflation despite extraordinary monetary policy easing over the past four years. Monetary easing undoubtedly stimulated aggregate demand, leading to an improvement in the output gap. However, since the Phillips curve was almost flat, prices hardly reacted. Against this background, the key question is why prices were so sticky. To examine this, we employ sectoral price data for Japan and seven other countries including the United States, and use these to compare the shape of the price change distribution. Our main finding is that Japan differs significantly from the other countries in that the mode of the distribution is very close to zero for Japan, while it is near 2 percent for other countries. This suggests that whereas in the United States and other countries the "default" is for firms to raise prices by about 2 percent each year, in Japan the default is that, as a result of prolonged deflation, firms keep prices unchanged.
    Date: 2017–06

This nep-mon issue is ©2017 by Bernd Hayo. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.